DAVID ISRAELSON- Special to The Globe and Mail
The traditional mortgage market, where younger Canadians scrimp and sacrifice in the expectation that they’ll be paid up when they retire, has been changing, says Mr. Veselinovich, vice-president of banking and mortgage operations for Investors Group in Winnipeg.
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“There has been a trend developing where people appear to be more comfortable in carrying debt into what may have typically been their retirement years,” he says.
Pre-retirement Canadians in their 50s are taking on an alarming amount of debt and are most at risk of bankruptcy, says April Dunn, owner of the Red Door Mortgage Group, a mortgage brokerage in Vancouver, citing a new study that examined some 7,000 insolvency filings.
“More than half of all retired Canadians are carrying debt, with many stuck managing two or more payments a month,” she adds, noting that it’s not unusual to see baby boomers who reach retirement about $400,000 short of their financial goals.
Yet some older people have other reasons for not winding down from the mortgage market. For them it’s a lifestyle choice, Mr Veselinovich says. “They have decided to use their resources for other matters and believe their cash flow is sufficient to service mortgage debt.”
Others are taking advantage of historically low interest rates. Still others are leveraging property that they have paid off or nearly paid off to pass funds to their children so the kids can afford to buy their own places, he adds.
People who downsize from large family homes can often afford to move to smaller places mortgage free. “That being said, there may well be prudent reasons for someone with cash in the bank to take out a mortgage,” says Jawad Rathore, a developer of seniors-focused condo properties.
“It can make better sense for their lifestyles and also for their balance sheets,” says Mr. Rathore, president and chief executive officer of Fortress Real Developments.
A client with sufficient investments to pay cash for a property may choose to mortgage instead, says Mr. Veselinovich. “Why? Because cashing in the investments may trigger income taxes and other fees.”
It may make more sense to use the investments to service the debt, he says, drawing out smaller amounts at a potentially lower marginal tax rate. “There may be opportunities for such an individual to make their mortgage tax efficient.”
It’s critical to have a mortgage plan, Ms. Dunn says. “Your mortgage is the financial tool that’s tied to your largest asset, so whether you decide to pay it off early or keep your other investments liquid, having a strategy and utilizing your mortgage as a financial tool can help you have the retirement you want.”
Age is not the only factor at work here, experts note.
“It is not a question of age. It is a question of suitability,” says Frank Margani, executive vice-president of strategy and development at Fortress Real Developments.
“There could be a healthy 80-year-old who wants to put 40 per cent down on a property and has the income streams to support mortgage payments, and then it’s fine. On the other hand, there could be a healthy 60-year-old, not yet retired but who can’t afford the mortgage payment.”
Age is not a barrier to obtaining mortgage insurance, either. Mortgage holders who put down less than 20 per cent on a property are required to buy insurance from Canada Mortgage and Housing Corp. Others who make higher down payments can buy life insurance, but Ms. Dunn warns that “just like other types of insurances the premiums increase as we get older, and there are some age restrictions by some insurance companies. Premiums can get quite expensive the older we get.”
Some other questions to consider are whether you want an open or closed mortgage and to what extent you want to involve other family members in the purchase. If they’re on the deed they can take over payments; on the other hand, dealing with your later-in-life property can be emotional for them.